The author has been described by News Ltd as an "iconoclast", "Svengali", a pollie's "economist muse", and "pungently accurate". Fairfax says he is a "Renaissance man" and "one of Australia’s most respected analysts." Stephen Koukoulas concludes that he is "85% right", and "would make a great Opposition leader." Terry McCrann claims the author thinks "‘nuance’ is a trendy village in the south of France", but can be "scintillating" when he thinks "clearly". The ACTU reckons he’s "an enigma wrapped in a Bloomberg terminal, wrapped in some apparently well-honed abs."

Sunday, May 29, 2011

Benchmarking our historical house price forecasts

Amidst all the noise, hysteria, misrepresentations, and, sadly, lies that one reads about Australian housing, a question that sometimes arises is how well Rismark's forecasts have performed. Our models, which a team of four PhDs have been working on for several years, have been very accurate, which has in turn informed our public pronouncements. The accuracy of the models can be tested both "live" and using an "out-of-sample" methodology. The latter involves asking the model to project the future, without in any way giving it access to that future data. Since clients pay us to access (and test) this information, we do not normally release it for public consumption. I nevertheless asked the team to provide me with a copy of out-of-sample tests of the accuracy of our historical forecasts for Sydney and Melbourne using our most basic iteration of the model. They are enclosed below. The proof is, quite clearly, in the pudding. Below the charts I have also extracted some comments from our monthly media index releases, which have been facilitated by our (very accurate) forecasts. Enjoy (note the y-axis is the projected capital growth rate)...

October 2009:

What we said – Christopher Joye: “We are projecting materially lower and more durable rates of house price growth going forward as home loan rates rise towards 7 per cent and beyond over 2010.”

What happened – House price growth declined from double digit rates in 2009 to just a 5% (ie, single digit) annualized rate in 2010. Home loan rates rose to 7.8%.November 2009:

What we said – Christopher Joye: “Although we forecast a resilient recovery in 2009, we have been surprised on the upside by the strength of conditions, which reflects Australia’s better-than-expected employment and growth outcomes. We project that as mortgage rates normalise capital growth rates will fall back to more subdued levels.”

What happened – House price growth slowed to a single digit rate in 2010.

December 2009:

What we said – Christopher Joye: “[A]s mortgage rates normalise to around 7-8 per cent, house price growth will taper back to more modest single-digit levels in 2010.”

What happened – House price growth slowed to a single digit rate in 2010.

January 2010

What we said – Christopher Joye: “We are projecting that the housing market will cool as mortgage rates normalise back to 7-8% levels. This implies that capital growth rates will fall back to single digit levels consistent with expected change in the incomes of prospective buyers.”

What happened – House prices grew in line with disposable household incomes in 2010. Home loan rates rose to 7.8%.

February 2010

What we said – Christopher Joye: “While the January sales data is typically thin, we have yet to observe a sustained cooling in market conditions, which Rismark expects to see given the recent tapering in seasonally-adjusted housing finance commitments. In the long-run, one would anticipate that house prices should track disposable incomes.”

What happened – You know.

May 2010

What we said – Christopher Joye: “We have been forecasting a cooling in capital growth rates back down to single digit levels since October last year. Australian disposable household incomes rose by 11.5 per cent in 2009—unsurprisingly, the cost of housing increased by almost exactly the same amount. In 2010, disposable household income growth will be less than 5 per cent. Over the long-run, residential property values track purchasing power quite closely. We believe 2010 will be no different in this regard…. As interest rates have normalised, and disposable income growth falls back to 3-5 per cent in calendar year 2010, it is natural to expect the cost of housing to follow suit.”

What happened – In 2010 house prices grew by 5%, which was broadly in line with year-on-year disposable income growth.

June 2010

What we said – Christopher Joye: “With disposable household incomes forecast to increase by only around 5 per cent in 2010, we have long predicted subdued dwelling price performance for this year.

What happened – See above.

July 2010

What we said – Christopher Joye: “We’ve been forecasting a substantial deceleration in housing conditions back to single-digit annualised growth rates since October 2009. Over the long-run, house prices track purchasing power quite closely. Disposable household incomes were only projected to rise by about 5% in 2010. We’ve had 4.7% growth in dwelling values in the year-to-date. We do not expect to see the market rise much more over the remaining year subject to labour market conditions and the course of monetary policy.”

What happened – House prices flat-lined from June 2010 onwards.

August 2010

What we said – Christopher Joye: “In contrast to claims that the decline in home values recorded in June would accelerate, we have seen quite the opposite: Australia’s housing market appears to have gravitated back to a no-to-very low growth trajectory, as we forecast.”

What happened – House prices flat-lined for the remainder of 2010.

September 2010

What we said – Christopher Joye: “We were not forecasting any further capital growth in the second half of 2010. Recent data vindicate this thesis. In the first seven months of 2010, capital city dwelling values have accreted by 4.8 per cent in raw terms, which is in line with consensus expectations for disposable household income growth.”

“Futures market pricing for interest rates has changed dramatically over the last month, shifting from expectations of rate cuts to at least two hikes by end 2011. But following hawkish RBA remarks, economists are now predicting we’ll get 4-6 cash rate hikes...

“If the resources boom combined with frisky consumer spending compel the RBA to lift the cash rate 4-6 times by end 2011, we would expect to see nominal dwelling values decline modesty. This is not a bad thing. Asset prices cannot always rise - the volatile sharemarket regularly subjects investors to savage swings. Since 1993 there have been five instances when the RBA has lifted the cash rate sharply. On every single occasion national capital city dwelling prices have flat-lined or declined. If the RBA aggressively raises rates, there is no reason to expect 2010-11 to be any different.”

"Borrowers applying for loans today should be prepared to service rates that are 1.5 per cent higher than what they are currently paying. They can, however, take succour from the fact that the peak rate is unlikely to endure for too long, and the ‘through-the-cycle’ headline mortgage rate should average between 7-8 per cent (ie, before any discounts).”

What happened – The RBA raised rates by, de facto, nearly two official hikes (or 40bpts in total) two months later in November. House prices started softening modestly thereafter.

October 2010

What we said – Christopher Joye: “2010 has panned out exactly as we expected. A strong start to the year followed by little-to-no capital growth in the second half…

“There are nevertheless risks in the near-term: home loan rates will eventually start increasing with the prospect that the peak mortgage rate could converge to close to 9 per cent, which is more than 1.5 per cent higher than the current average variable mortgage rate of 7.4 per cent. Our analysis suggests that a substantial increase in rates would put some downward pressure on dwelling prices. Household balance-sheets will be supported by a strong labour market and robust income growth. But let’s be clear: it is now just a matter of time before the RBA and/or the banks raise rates again. New borrowers taking out loans should be prepared to service rates 1.5 per cent higher than what they are currently paying.”

What happened – The RBA raised rates by, de facto, nearly two official hikes (or 40bpts in total) a month later. House prices started softening modestly thereafter.

November 2010:

What we said – Christopher Joye: “We believe that there is a risk of at least three cash rate increases in 2011. In this event, our central case is that there will be little-to-no nominal dwelling price growth over 2011, with a chance of small nominal declines. This is no bad thing, and will only further improve asset-class valuations.”

What happened – There has been no house price growth in 2011, with prices off by less than 1% in raw terms.

January 2011:

What we said – Christopher Joye: “We expect, however, to see the RBA lift rates considerably more than that implied by the futures market in the face of rapidly brewing inflation and wage pressures, and our central case is, therefore, little-to-no capital growth in Australian home values with a resultant improvement in the market’s valuation fundamentals. As rates start declining in 2012, this should unleash some attractive affordability dynamics. When all is said and done, the key question will be whether the RBA waits for burgeoning wage and consumer price inflation to manifest in the official statistics, or whether it tries to pre-emptively staunch these problems.”

What happened – Inflation surprised on the upside in the first quarter of 2011, and economists now expect the RBA to hike twice more this year.

Update: Jesse was born at 930am this morning in Laguna Beach, California, which is where I am right now. He arrived safe and sound--it was a...

Hey there...

I first started blogging on ideas relating to economics, finance, investments and housing following an invitation from Business Spectator. Please note that I may have an economic interest in any of the items discussed here. You should also be aware that these are my own personal views and do not represent the opinions of any other individual or institution. This material is not intended to provide, and should not be relied upon for, investment advice or recommendations. Readers are urged to seek professional advice before making any investments. Call 1800 YBR YBR to find a financial planner near you.

About Me

While this is a personal blog, professionally Chris is a director and strategic advisor to a number of funds management and financial services companies. In 2009 The Australian newspaper selected Chris as one of Australia’s top 10 “Emerging Leaders” in its economics category. In 2007 Chris was selected by The Bulletin magazine as one of Australia's "10 Smartest CEOs" and by BRW Magazine as one of "Australia's Top 10 Innovators". He previously worked for Goldman Sachs and the RBA. In 2008-09, the Australian Government invested $20 billion in a radical policy proposal developed by Chris to provide liquidity to Australia’s securitisation market. In February 2009, Chris was invited by the Rockefeller and MacArthur Foundations to present innovative policy solutions at the private Transforming America’s Housing Policy summit for Obama Administration officials. Chris served as a Director of The Menzies Research Centre from 2003-07. He has published widely on matters relating to financial economics, and is a regular TV and media commentator. He is a Research Affiliate with the Centre for Ideas and The Economy at Melbourne Uni.